In Hong Kong, Retail Rents Lose Their Shine

China's Crackdown on Corruption Hits Sales of Luxury Goods

Retail rents in the world's most expensive market are finally cooling. The WSJ's Te-Ping Chen talks with Savills Director Kathy Lee about how companies are reacting to a slowdown in spending by Chinese consumers.

HONG KONG—After years of surging growth, rents for storefronts on some of the world's most expensive, and crowded, streets are finally cooling.

Rent increases on major Hong Kong shopping streets have paused following a slowdown in growth in spending by people chasing the latest Gucci handbags and Rolex watches. Storefronts now stand empty on prime streets in top shopping districts, a rare sight in this densely populated city of 7 million. Some have been vacant for months.

"People used to fight for these spots, but now, there's just nobody fighting," said Nicole Wong, an analyst at CLSA, an Asia-focused brokerage.

Since 2009, retail rents on prime streets in Hong Kong have more than doubled, according to SavillsSVS1.40% PLC, a real-estate services provider. Growth slowed noticeably in the first half of this year, and rents fell about 2% in the quarter ended this week, Savills estimates. On Queen's Road Central, Hong Kong Island's main thoroughfare and home to some of the city's priciest properties, rents slumped 5% in the year's first half, according to Savills.

Tour Hong Kong's luxury shopping districts

Real-estate industry officials give several reasons for the slowdown, ranging from a crackdown on corruption in mainland China, to saturation by luxury brands in Hong Kong, to retailers such as Ralph Lauren Corp. opening stores in less prestigious locations. The high prices have also driven out some small independent stores, many of which occupied the now vacant shops.

The biggest influence is mainland China. Hong Kong has long served as the main shopping destination for mainland tourists, 35 million of whom came to the city last year. Retailers have sought to take advantage of the demand—spending by such tourists accounts for about a quarter of the city's retail sales—competing furiously for the best spaces. Prime rents in the city have risen to an average of more than US$4,300 per square foot per year, nearly four times as much as in Paris or London, according to CBRE, a commercial real-estate services and investment firm.

Mainland Chinese authorities announced a crackdown on corruption last year, and vendors of luxury goods, sometimes used as gifts to smooth business relationships, have been feeling the chill. While it is difficult to prove a direct connection, sales have tended to fall, or grow more slowly, since the crackdown.

Hong Kong still imports more Swiss watches than the U.S. and China put together, but sales have slumped by 9% in the first eight months of this year to US$2.87 billion, according to the Federation of the Swiss Watch Industry. At Harbour City, a top-end mall, sales growth slowed from 34% in 2011 to 13% during the first seven months of the year.

Property agents say that numerous international brands have scaled back their expansion plans in Hong Kong this year.

"We've certainly seen a peak," says Michele Woo of brokerage Cushman & Wakefield. "It's not just a temporary reaction. People are still spending, but not as exaggeratedly as before."

Luxury brands may have also gotten their fill of Hong Kong. Cartier has nine stores in the city, more than double the number it has in New York City, while Burberry and Coach each have around a dozen stores. Luk Fook, a local jewelry brand, has 42 stores, while rival Chow Tai Fook has some 80 stores, giving it more outlets in the city than there are Kentucky Fried Chicken restaurants here.

Luk Fook said it expects demand from mainland visitors to continue boosting its business, though it added that high Hong Kong rents and global economic uncertainties could make 2014 more challenging. Chow Tai Fook said it focuses on mass-market products for consumers "who have real needs to buy jewelry items. " It said that its business was minimally affected by anti-corruption measures, if at all.

Tiffany, with nine outlets, bucked the trend this summer by unveiling a big store that opens onto the street in the city's perennially packed Times Square shopping mall. Tiffany didn't respond to a request for comment.

While some landlords in Hong Kong are still holding out for higher rents—and letting their stores sit empty as a result—a few are cutting their asking rents by 10%-15%, says Kathy Lee of Savills. She expects rents to either stay flat or drop as much as 5% in the coming months.

Gary Lee, a local property agent, said that in Central, the city's financial district, the landlord of one shop that has sat empty for more than six months has dropped his rent by about 5%. "He doesn't feel any pressure, he can afford to let it sit longer," he said.

A number of brands such as Zara and Calvin Klein have expanded into Hong Kong's suburbs, which stretch north to the mainland border with the wealthy cities of Shenzhen and Guangzhou. Growth in rents in major shopping malls more than doubled to 5% in the second quarter, from 2% in the first, thanks mostly to rent increases in suburban shopping centers.

Last year, 57% of the Chinese tourists who visited the city stayed just one day. Fu Xiao-mei, 25 years old, recently shopped for gold jewelry for her cousin, but skipped the city's major shopping districts. "It's farther away and I'm only coming for one day," she said. "It's too much of a hassle, why bother?"

The tempering in rents comes too late for some. In 2004, Hong Kong resident Timothy Fan started a local chain of hat stores, Emergency Room, that included locations in Causeway Bay and Harbour City, two shopping meccas for tourists. But after his rent for a 180-square-foot space galloped upward from a monthly 28,000 Hong Kong dollars (US$3,600) to HK$40,000 (US$5,200) in three years, Mr. Fan decided to shut the chain down last November.

"We had a lot of loyal customers at the time, but it was just too tough. The rent was crazy," he said. "We had to move shops every few years."

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